Israel Aerospace plans to set up VC fund

With government permission, IAI plans investing up to $1.5 million in each of five startups annually.

Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) will begin proceedings in the coming days to obtain a permit from the Government Companies Authority to establish a venture capital fund for investing in startups, sources inform "Globes."

According to the plan being formed at IAI, the fund will operate for a decade and invest in five startups annually that are developing new technologies involving IAI's core activity, such as space, navigation of drones, robotics, autonomous vehicles, electrical propulsion, micro and nano-satellites, sensors, etc.

The company intends to invest $500,000 to $1.5 million in each startup through the fund. Most of the money for the fund will come from IAI's research and development budget.

Since IAI is a government company, carrying out the plan requires approval from the Government Companies Authority. A meeting is scheduled for next week between IAI executives and heads of the Government Companies Authority, at which the matter will be discussed.

Competing with private companies

IAI's new fund is designed to solve a large part of the company's difficulties that it now encounters in its activity in working with startups for the purpose of fostering innovative technologies for use in its future production lines. These difficulties arise from IAI's status as a government company subject to strict state regulation and supervision.

"In aspects of innovation, a significant change has occurred in the past two or three years. We see this and need to be part of it. More and more startups are spearheading innovation. As a government company, our room for maneuver with them is limited. Any plan for investing in such a venture requires prior authorization from the Government Companies Authority and the Ministry of Defense. When we're talking about startups that hold short financing rounds that sometimes end within a week, we have no chance of getting the appropriate authorization and being in the picture," IAI EVP business development Zvi Maayan told "Globes."

IAI recently completed work on its venture capital fund model, based on an examination of models adopted in recent years by large security and aerospace companies worldwide, including Boeing, Lockheed Martin, and Airbus.

"We did thorough work. We learned from other cases what works and what doesn't, and we'll bring these insights to the Government Companies Authority in the framework of our request to establish the fund. The goal is to provide IAI with flexibility that will enable it to invest and intervene rapidly with the help of a set-up that will not only be able to invest in companies, but will operate in the later stages to install new technologies within IAI's divisions and plants," Maayan added.

IAI's glass ceiling

IAI senior executives have complained for many years about a glass ceiling and exhaustion of capabilities faced by the company in the framework of its regular business activity, due to inflexible restrictions imposed by the Government Companies Authority, IAI's regulator, despite the fact that IAI operates as a business company for all intents and purposes and competes with giant companies from all over the world, many of which have great managerial freedom of action and flexibility that enable them to act on far shorter notice than IAI. Company executives who believe that an old plan devised by the state to issue minority shares in IAI should be carried out have cited this problem in the past.

It has recently emerged that Government Companies Authority director Yaakov Quint and Ministry of Finance Accountant General Rony Hizkiyahu are trying to put new life in to this plan for a share offering and are planning to carry it out in 2019.

The plan envisions selling 25-49% of the company's shares to private investors in two rounds, while making IAI a public company in a way that will enable it to raise money more cheaply than in a bond issue, which burdens the company because of the high interest rates on the bonds. The plan also includes relaxing the regulations restricting IAI's growth plans through the acquisition of Israeli and foreign companies in the framework of measures of consolidating IAI's business in the target markets in which it operates.

Over the past decade, there were several efforts to hold an offering for the company, but these were never carried out, among other things because of the financial crises experienced by IAI and the need to coordinate the measure with IAI's dominant workers' committee.

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IAI workers' committee chairperson Yair Katz recently made it clear that there would be no offering by IAI without involvement from the company's workers. IAI has 14,000 employees. At the end of this month, Maj. Gen. (res.) Nimrod Shefer will replace Joseph Weiss as CEO of IAI.

"We have learned to work with startups"

IAI sources told "Globes" that the plan to establish a venture capital fund is one of a series of measures that the company has been pushing in recent years aimed at expanding its exposure to innovation and ventures relevant to its core business.

Another example of these measures is the cooperation that has developed during this period between IAI and Israeli startup SighTec, which has developed groundbreaking technology in image processing and computer vision. "The company is currently part of a number of IAI's projects, and we are also developing projects jointly with it," IAI military aircraft group senior director R&D Nir Tel-Oren told "Globes." He added, "At the beginning, we didn't have much experience in working with a company like this, but with time, we learned to reach agreements in the framework of a process that required flexibility and creativity."

Cooperation between IAI and SighTec began already in the startup's early stages. "We assessed the technology's actual performance and became familiar with its uniqueness. It later became our subcontractor for full payment in the development of capabilities needed in a number of our projects. Working with a startup is no less difficult and complicated than working with a giant company with reference to aspects that are very sensitive for startups, such as intellectual property. In the past two years, we have developed know-how and theories of completeness on this matter," Tel-Oren explains.

Tel-Oren also said, "There are over 100 startups of great interest to us in our database. With a few of them, we have pilots in various stages following a selection and focusing process we did with them. At the same time, our goal is to work in some way with a limited number of startups with a high value for IAI."